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Add spice to your portfolio

The ‘Goldilocks’ economy, which is neither too hot nor too cold, provides attractive investment opportunities, according to our Head of Research Christian Gattiker. We asked him which areas are worth a closer look.




How would you describe the market environment as we are heading into the second quarter of the year?
Christian Gattiker: The world economy is having the business cycle blues, which means that the best of growth is behind us. However, the final nail in the coffin of the cycle isn’t there, and that’s inflation. Inflation is pretty much absent. And could be for a little longer. So this is actually a quite benign environment to add spice to one’s portfolio.

Where do you see the most attractive investment opportunities in the equity space?
In equities, we like the industrial sector. It’s a very cyclical sector, and it was beaten down in the second half of last year because of all these cyclical and growth concerns. But it has major recovery potential and will provide investors with good growth over the course of 2019. We also like the conglomerates, which usually trade at a discount but provide very decent cash flows; or a particular niche such as the aerospace, which benefits from a recovery in sentiment. Overall, industrials could be the biggest surprise this year in terms of positive earnings.

Are there any other areas that look interesting for equity investors?
Health care is our favourite defensive sector in equities. It’s one of the key calls because it shows very decent growth, mid-single-digit sales and high single-digit earnings growth. It also very much benefits from structural trends, which are almost independent of the business cycle. This is about ageing, this is about high demand in emerging markets, and it is also about mature-market workers spending more as they earn more in the current cycle. So health care looks to be the sweet spot in the defensive, non-cyclical sectors. We also like the large-cap pharma and MedTech stocks, which are worth being held in every portfolio.

Where do you see the most attractive investment opportunities for bond investors?
Looking at debt, we still have time to ramp up risk – credit risk, in particular, if you think that the economic cycle holds. That’s when you usually add to credit risk. So: highly geared companies and, above all, high yield ones. The US high yield space is rather pricey, whereas Europe is rather cheap. Given that Europe has more growth concerns than the United States, it’s best to go somewhere down the middle, which means low-investment-grade European bonds. One can get a decent premium of 170 basis points on the sovereigns. That’s decent enough to compensate for the credit risk you take. So low investment-grade European bonds are our favourite space in the mature market.

Is there any particular area within fixed income that looks attractive at the moment?
Asia is benefiting a lot from the measures that the Chinese government has put in place, such as fiscal and monetary easing. The fiscal easing is selective, very concentrated, but still effective. The monetary easing makes it much easier for Asian high yield, or highly geared, companies to refinance their debt, and we expect a major and continuous relief there. While this process is already happening, we expect that it has further to go, so Asian high yield and Asian property-related bonds are key in any emerging market portfolio.

In a nutshell: what should investors remember for this second quarter of 2019?
Investors should remember – for this quarter, and indeed for the whole of the summer – to stay invested. If they are not, they should find ways of getting invested because this is an environment where you need to be invested to make any return at all and to compensate for the very low cash rate you earn in non-risky stuff. So, stay invested.